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When the Bank of Canada sells euros in the foreign exchange market, it is engaging in...

When the Bank of Canada sells euros in the foreign exchange market, it is engaging in (quantitative easing, sterlization, or foreign exchange market operations)

Could you explain why its the answer as well. Thanks

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Answer #1

If the bank of Canada is a selling euros it must be purchasing Canadian dollars. If there are no off setting open market operations against this strategy then this is not a sterilization. Sterilization is aimed at neutralizing the effect of money supply on the domestic market. It is also not quantitative easing because there are no large scale purchase of assets against Canadian dollars so that money supply can be increased.

In this case we see that the bank of Canada is only purchasing Euros in the foreign exchange market increasing the supply of Euros and reducing the supply of Canadian dollars. Because there are no other action taking place, it is just a foreign exchange market operation.

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